Warrior Trading Blog

Proof Of Work Definition: Day Trading Terminology

proof of work

Proof of work is a cryptographic term describing a system or function that requires work or effort on the part of a user.

It is essential to the mining process that drives a cryptocurrency, where the distributed digital ledger at the core of a cryptocurrency is updated by users who are required to perform costly proof of work computations.

Origins in Cryptography

Proof of work systems were originally developed as a way of reducing hacking or spamming by requiring anyone who wished to access a system to perform costly computations. It helps to eliminate unwanted connections by making any connections prohibitively costly for frivolous users.

The same principle applies in the mining of cryptocurrencies. The computation power required by a cryptocurrency’s proof of work makes attempts to manipulate the distributed digital ledger economically unfeasible.

Alternatives to Proof of Work

While proof of work is an effective means of ensuring the integrity of the distributed digital ledger at the core of a cryptocurrency, it is also seen as unnecessarily costly compared to equally effective alternatives.

One popular suggested alternative is proof of stake, which would decrease the required computing power for miners who ‘lock in’ some of their units of that cryptocurrency. This way proof of stake would act similar to a deposit, where locked in units of a cryptocurrency would effectively pay interest to the owning miners.

Final Thoughts

Proof of work is an extremely important concept to understand for day traders who wish to trade in cryptocurrencies. The proof of work process is what allows for the decentralized peer-to-peer transactions that define cryptocurrencies.

However, proof of work is seen as a dated concept by many within the cryptocurrency sector, and a number of popular alternative means of ensuring effective and reliable cryptocurrency mining have been proposed and implemented.